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TMI Blog2012 (11) TMI 1104X X X X Extracts X X X X X X X X Extracts X X X X ..... y specific discrepancy. 3. That the Ld. CIT(A) while sustaining the rejection of the books of account has erred in ignoring the fact that the books of account are duly audited by the Chartered Accountants and being an excisable unit, the complete stock and production records are maintained and produced before the AO and no specific discrepancy noticed by the A.O. 4. That the Ld. CIT(A) while sustaining the rejection of the books of account has erred in ignoring the fact that Excise department had carried the audit of total production results of the assessee, including the consumption of raw material, burning loss, wastage and finished products and had not found any discrepancy and thus, the action of the CIT(A) in rejecting the book result is contrary to the finding of the Excise Authorities. 5. That the Ld. CIT(A) has erred in sustaining the addition of Rs. 5,59,50,007/- out of addition of Rs. 17,31,59,753/- made by the AO on the assumed quantity of state of hypothetical working without any proper basis by ignoring the correct sales as shown as per books of account. 6. That the Ld. CIT(A) has erred to consider that the AO while assuming the quantity of sale has ignored the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sposed off." 3. The Revenue has raised following grounds of appeal: "1. That on the facts and circumstances of the case the Ld. CIT(A) has erred in allowing relief of Rs. 117209656/- out of total addition of Rs. 173159753/- made by the A.O. on account of suppression of sales. 2. That while allowing the relief of Rs. 117209656/- Ld. CIT(A) has failed to appreciate that the unaccounted production and sales have taken placed throughout the year, which fact has also been confirmed by the Ld. CIT(A). 3. That while allowing the relief of Rs. 117209656/- Ld. CIT(A) has failed to appreciate that the addition on account of suppression of sales was made by the AO by thoroughly examining assessee's trading/manufacturing account and elaborately discussing each and every relevant aspect. 4. That while allowing the relief of Rs. 117209656/- Ld. CIT(A) has failed to give any basis for the same. 5. It is prayed that the order of the Ld. CIT(A) be set aside and that the A.O. be restored. 6. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of." 4. The brief facts in the appeals of the assessee and the Revenue are that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accountant and that the new chart had been prepared to show the correct figures of raw material consumption and bifurcation of wages. The assessee submitted that burning loss occurred when the raw material was cut into small pieces, when raw material was heated, during rolling and in the cutting of scrap. Burning loss was stated to increase when coal was used as fuel instead of furnace oil by 2% to 4% and stated that coal was used in preference to furnace oil towards as the price of furnace oil increased towards the end of the year. The average burning loss in burning and cutting was stated to be 10% which was claimed to be normal in the nature of its manufacturing activities. The scrap was stated to vary from month to month depending on defects in the products manufactured. It was also stated that the goods not accepted by the Govt. officials were sold as scrap at higher rates than normal scrap. It was also stated that due to heavy burning loss and large generation of scrap the assessee company had stopped manufacturing of this angle for the Govt. in the subsequent years. No record of day to day consumption of raw material as well as the generator, was stated to be maintained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee had valued its closing stock of angle at a rate 11.89% higher rate than the average sale rate of Angles and closing stock of Rods was valued at rates 52.52% higher than the average sale rate of rods. The closing stock of scrap was valued at rates 95.92% higher than its average sale rate. He valued the sale rate of the production of 10117.48 MRS of finished goods of angle & rod and 432.83 MTS of scrap at the rate taken in closing stock for valuing them to arrive at the difference in sale consideration of Rs. 16,53,07,623/- to which GP @ 4.75% of cost price was added to arrive at the addition of Rs. 17,31,59,753/-. 5. The Ld. counsel for the assessee made written submissions which are reproduced in para 3 & 3.1 at pages 6 to 18 of CIT(A)'s order in support of his claim. The Ld. CIT(A) forwarded the written submissions and the copy of the stock register to the AO for his comments on admissibility of fresh evidence submitted by the A.O. The AO in his comments reproduced the assessment order and relied upon the same and submitted that there was no merit in the submissions of the assessee and also objected to the admission of additional evidence. The assessee in rejoinde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the totaling error seems to be adding up only till the last month of the year and the accumulated error has increased to 735.623 MTS till March, 2007. The AO prepared a data chart 'B' of raw material inuts complied from the initial reply of the assessee filed on 22.10.2009 and the stock register produced on 24.12.2009 vide para 6.2. of his order, which is available at pages 22 to 25 of his order. The assessee has also submitted revised chart 'D' in the appellate proceedings before the ld. CIT(A) to correct certain errors prepared by the AO in the assessment order. This fact is available vide para 6.4 of CIT(A)'s order. The Ld. CIT(A) vide para 6.5 of his order, however, endorsed the AO's conclusion that the consumption of raw material shown by the assessee does not reflect the correct state of affairs of the assessee company in this regard. 6. As per para 7 of his order at pages 25 & 26, the Ld. CIT(A) observed that the assessee records the scrap generated in the excise register. The total scrap generated is declared at approximately 47.97% of the raw material consumption. He observed that it is undoubtedly a large percentage considering any type of rolling mill. It was obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from a third party for the purpose of assessment unless the assessee has been confronted with the same and therefore, the AO was not justified in using the information collected from M/s. Mukesh Steels Ltd. for making the impugned addition. 9. As regards the contention of the assessee that without finding any defects in the books of account, the AO was not justified in rejecting the books of account. The Ld. CIT(A) vide para 8.1 of his order observed that even if no direct defect is found in the entries recorded in the books of accounts, the AO made the additions to the trading account if certain other factors like higher wastage or low yield were found as held in the decisions by the Hon'ble Punjab & Haryana High Court in the case of Harcharan Dass Textiles Mills 272 ITR 580 and Ram Partap Oil Extractions 154 Taxman 388 (P&H). Therefore, the ld, CIT(A) observed that it is a fit case where books results can be rejected. 10. The additional evidence sought to be admitted by the assessee in the form of certificate from the general Manager, District Industries Centre, Jalandhar stating that the assessee's unit could lead to higher burning loss of 10%, need not be admitted as addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of end cuttings to be 3.90 to 4.10%. In my opinion, considering that some angles were being rejected as per excise register on record, part of which was being reused, the scrap due to rejections can be estimated to be not exceeding 10% of the production of angles and 5% of the production of rods and flats. It is held accordingly. The production of angles shown by the assessee is 2495.296 MTS, which will therefore lead to scrap of 249.53 MTS. Out of the total consumption of steel of 10,823.83 MTS of raw material, the invisible waste @ 10% will amount to 1082.83 MTS. The production of angles and waste/rejection therefrom, thus, total 2744.826 MTS. The remaining metal from the raw material consumption, taking into account the angle production, rejections therefrom and the invisible waste, works out to 6,996.62 MTS [10,823.83-2744.826-1082.38] which has apparently been used for production of rods/flats. Estimating the wastage at 5% while producing rods/flats, the production of these goods works out to 6646.790 MTS and visible scrap of 349.831 MTS. The final position of saleable goods emerging from the aforesaid calculation is as under: Production of Angles : 2495.296 MTS Produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcentage of generation of scrap and invisible losses was much higher than normal. The appellant has led evidence to rebut the AO's presumption in respect of invisible losses, but not as regards the scrap generation. The explanation submitted in this regard by the appellant has also been found to be untenable. Hence, notwithstanding the entries in the books of the assessee, I am of the view that addition is called for on the basis discussed above. 8.7. As regards the quantum of addition, I am of the opinion that the AO was not justified in taking the rate of goods in the closing stock as the rate of sale of goods for estimating the unaccounted sales, since the sale rates may vary during the year and the closing stock rates are only the rates at the end of the year. When the unaccounted production and sales have taken place throughout the year, as appears in this case, application of the average rate of sales during the year should give a better picture of the unaccounted sales. The sale value of angles at Rs. 7,88,03,910/- recorded in the books is, therefore, not disturbed. The sale rate of rods/flats is taken at the average rate of Rs. 21,609,83 PMT and that of scrap is taken at R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of purchases or sales or carrying on of unaccounted production or any other evidence, suggesting payment of wages or salary, outside the books of accounts. viii) The sales and gross profit have been progressive as per the following detail:- Assessment Year Sales G.P.Rate 2006-07 26,22,98,186/- 4.18% 2007-08 31,03,39,457/- 4.75% GROUNDS OF APPEALS. The 1st four grounds of appeals relate to rejection of books of accounts and following are our submission:- 1 The Assessing Officer had rejected the books of accounts as per last para of page 10 of the order. He has rejected the books of accounts only on account of detail submitted during the course of assessment proceeding, regarding the monthwise consumption of raw material of all the items put together and which was rectified immediately with supporting evidences as per letter, dated 22.12.2009, reproduced at page 4 of the order. The Assessing Officer has then drawn certain conclusion on the basis of inadvertent wrong figure of monthwise consumption, provided by the appellant initially and, therefore, his conclusion as given at page 9 and 10 of the order, with regard to burning and invisible loss and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds of appeal and, thus, the CIT(A) has erred in confirming the rejection of books of accounts, when no defects have been found in the various production and RG-1 and RG-23 register. 7 Both the Assessing officer and CIT(A) have failed to pin point any single defect in the maintenance of voluminous and various types of manual and computerized stock registers and even the figures in the consumption register tallies with the various production registers or their day to day record for which no fault has been found. They have also failed to see that it was manual register, consisting of three items being maintained on day to day basis and to calculate the figures from those registers as monthwise, could lead to some bonafide calculation errors. 8 There is no allegations by the Assessing Officer and CIT (A) that the figures of consumption as noted in the manual register are manipulated or there are any cuttings or any other defect, whatsoever, which could have lead to disbelieving production result of the assessee. 9 Then the Excise Authority have not pointed out any defect in the production as disclosed in such registers and i.e. perhaps the CIT (A) have not rejected the books of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under compulsion were to the tune of 47.98% and which according to the Assessing Officer was every substantial and he accordingly restricted the same to 4%, treating it as normal scrap and, besides that he had allowed the burning loss to the tune of 2.5% against 10% as claimed by the assessee. This finding of the Assessing Officer is at page-13 of his order. vi) This adhoc consideration of 4% as rejections and 2.5% of burning loss is without any reason or any cogent material on record and the Assessing Officer has totally ignored the following facts:- a) The rejection by the Defense Department have been sold to the identifiable parties at the rate of scrap, since there was no buyers of odd sizes of Angles. b) Such rejection had to be sold as 'scrap' because they were manufactured on the specific order, and on the basis of detailed specification provided to us by the 'Defense department' and which items are not consumed by any of the parties and, thus, it had been sold at the rate of scrap by weight after cutting them into small pieces. For such rejections, we had produced the necessary correspondence and which had not been doubted as per submission at page 13 para 14 to the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Angles to the Defense Department, being the first year of the assessee's manufacturing and thus, one of the Govt. department accepted such rejections on the basis of authentic records, it does not give license to the other department to reject such day to day manufacturing record, consumption records, coupled with the fact that no evidence of interpolation in the books of accounts/registers etc have been found and, as such, ad-hoc adoption of 10% as sale rejection, resulting into scrap sale by the CIT (A) on angles and 5% on the production of Roads and Flats is totally arbitrary, perverse and needs to be quashed. Reliance is being placed in the judgment of M/s. Shiva Exports of the Chandigarh Bench of the I.T.A.T. as reported in 25 SOT 512, wherein on the issue of acceptance of records by some other Govt. department i.e. Excise can not be arbitrarily rejected, have been dealt in that case in para 19 of judgment and it has been held that if the statutory requirements have been complied with, verified and accepted by the Statutory authority, then the Assessing Officer cannot make the addition on the whims and fancies to arrive at the arbitrary conclusion. Copies of monthwise retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no addition can be sustained on doubt or suspicion. Reliance is being placed on the following judgment a) M/s. Monga Metals Pvt. Ltd, Vs. ACIT (2000) 67 TTJ 247 ( Allahabad). b) M/s. Elite Developers Vs. DCIT(2000) 73 ITD 379 ( Nagpur Tribunal) c) DCIT Vs. D.N.Kamani (HUF) (1999) 70 ITD 77 ( Patna Tribunal) d) JCIT Vs. Gramophone Company of India Ltd,(2004) 265 ITR (A.T.) 46 ( Kolkata Tribunal) e) CIT Vs. Ram Narain 224 ITR Page 180 ( Punjab & Haryana) J) The CIT (A) has allowed 105 of the invisible burning loss and here again the CIT (A) has misdirected himself in allowing 10% burning loss on the finished products. Actually, which should have been in the input of raw material, because the finished product is received after the manufacturing process and burning loss arises much before the finished goods, remanufacture. Thus, in nutshell, this was the first and last year of the supplies to the Defense department and which resulted into heavy rejections, because the assessee could not come upto the specific designs of the Angles and the Excise department having accepted such heavy rejections of the assessee and there being no evidence of purchase and sales outside the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see that all the figures in the subsequent chart/amended chart given to the AO tallied with the books of account. As regards the consumption and production are concerned, it was also pointed out before the Ld. CIT(A) that the mistake can be done by any person and in the present case, the AO himself has made many totaling mistakes, which is borne from the corrected Data Chart 'D' furnished subsequently before the AO and is a matter of fact available in the assessment order. It was also pointed out before the ld. CIT(A) in his explanation that if the AO can make mistakes in totaling, any person can genuinely make mistakes in totaling and it is the corrected figure which tallied with the books of account and such records ought to have been considered. 13.2. As a matter of fact, controversy has arisen only for nonconsideration of the revised chart, which has been submitted and of course and perused by both the authorities below but not considered for the reasons best known to them. Though the revised figures were found to be correct but the same having not been considered, the books of account cannot be rejected and no addition on this account can be made. Therefore, the Ld. CIT(A) is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO nor by the Ld. CIT(A). The Ld. CIT(A) himself has observed vide para 8 of his order at page 29 that the information collected by the AO from M/s. Mukesh Steels Ltd; without confronting the assessee cannot be used for the purpose of assessment, which is against the provisions of section 142(3) of the Act. and violation of principle of natural justice in view of the decision of Kishinchand Chellaram vs. CIT 125 ITR 713 (SC). 13.5 As regards the variation in the monthly chart observed by the AO and the ld. CIT(A), on perusal, we are of the view that there is no mistake or error as per revised chart submitted by the assessee, which tallies with the books of account or records. 13.6. As regards the re-use of the rejections, there is nothing on record that the assessee has re-used the whole of the rejections, since the assessee was not having any furnace, be that a rotary or an induction furnace, but was having a regular furnace in the Rolling Mill. The Ld. CIT(A) relied upon the scrap generated by M/s. Mukesh Steels Ltd; who does not produce the product as the assessee does. Therefore, such reliance by the ld. CIT(A) or by the AO has resulted into absurd results and cannot be ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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